Yesterday[1], we looked at whether GS was front-running, well, everyone, via a sniffer program that saw all trades on the NYSE prior to their execution. Theoretically, this would allow GS to buy (or sell) stocks, selling (or covering) them back to the now compromised trader towards the end of their purchase (sale). Or, they could take a position, assuming there was more flow behind the initial order. Or, they could arbitrage a few fractional cents each trade.

The idea is fascinating. If the allegations are true — and I have no idea if they are — there are all sorts of fascinating repercussions.

• Why hasn’t the NYSE caught this? Is this another nail in the coffin of SRO (self-regulating organizations) ?

• Alternatively, if they saw it, why haven’t they done anything about it? Its not like the NYSE is run by Goldman alums (oh, wait . . . )

• What corporate or regulator can challenge GS? Congress? SEC? Federal Reserve? How powerful is Goldman? Is anyone, aside from Matt Taibbi, willing to take them on ?

• Perhaps Goldman Sachs is less smart as a group than previously believed — their returns are a function not of genius, but of cheating.

Now for a does of reality.

How might this work? The GS sniffer sees an order for 1 million shares. The computers pick up a 100,000 shares and based upon conditions, put them out for sale at some price higher. At 10 cents, its $10,000. In order for this to amount to any real amount of money, it would have to happen 1,000s of times a day. If GS’ program had 10% of daily volume of a billion shares, picking up a dime, its only $10 million per day.